Super-computers party, as energy markets trade at record ratios

WTI v natgas Mar11.pngSomething very strange has been happening to US energy prices over the past 2 years. The chart above shows the ratio between WTI crude oil pricing and natural gas:

• It was between 6.0 and 13.0 for 22 years between 1986-2008, with some minor exceptions, and averaged 9.9.
• Yet since January 2009, it has been between 9.0 – 25.0, and averaged 18.3.

WTI has ~6 times the energy content of natural gas. So its floor at 6.0 makes good sense. Equally, there were periods of supply disruption between 1986-2008, such as Gulf War 1 in 1990.

But there is no logic behind the dramatic increase in the ratio since 2009. Crude oil inventories have never been higher, in either the USA or globally. And there is plenty of spare capacity, if supplies were to go tight.

The real reason is the easy money policies of the central banks, particularly the US Federal Reserve. These have combined with the development of super-fast computers, which now dominate much financial market trading.

As Bloomberg note in an excellent article, “as shares have been traded more furiously, the stock market has become more volatile, more disruptive and less useful“. The blog’s friends in energy markets see the same trend of increased volatility – last Friday, naphtha prices traded in a $25/t range!

In the short-term, Libyan oil seems likely to be removed from world markets by the current UN action. But Saudi is already pumping 8.9mbd, according to latest reports. And OPEC quotas have effectively been abandoned.

But as long as the US Fed provides the cash, the super-computers will party on:

• Today’s high prices are causing demand destruction down the value chain.
• Yet chemical companies have to buy forward, as long as feedstock prices are rising.

The risk, of course, is that one day, the Fed may turn off the liquidity tap and stop the super-computers’ party. Then we could easily suffer another period of major destocking, similar to that of H2 2008.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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